Business News

Wall Street banks negotiating deal over finance disaster

Apr 15, 2011, 16:38 GMT

New York - Wall Street Banks are being grilled by US securities regulators over alleged fraud in mortgage-bond deals that played a large role in triggering the financial crisis of 2007-2008, the Wall Street Journal reported Friday.

The report, which cited unnamed people familiar with the talks, said that the Securities Exchange Commission (SEC) was discussing settlement deals with the banks.

Banks named in the negotiations include JP Morgan Chase & Co, Citigroup Inc, Morgan Stanley, Merrill Lynch now part of Bank of America Corp and UBS AG.

The move would be the most far-reaching attempt so far by regulatory officials to hold Wall Street accountable for its role in the subprime mortgage bust, the Journal wrote.

The financial crash of autumn 2008 nearly brought the US financial system to its knees and had globally disastrous ripple effects from which the world is still recovering. The main culprit in the crash was the rise of new investment instruments in subprime mortgages granted by banks to people without good credit records or the ability to pay off expensive houses.

When the ballooning housing market crashed, many homeowners saw the value of their houses plummet, while others were unable to pay off their loans. The result was a recession the likes of which had not been seen since the 1920s.

The US government launched a trillion-dollar bailout of the banks, but has not brought criminal cases against bank and finance executives for their role in the crisis.

Pressure is growing, not only from Congress, but also from investors who feel they were misled by the banks. Large investors and institutions especially charge that the banks sold them bundled mortgage investments which the banks knew would be worthless.

On Wednesday, a Senate committee released a report that accused Wall Street firms of purposely misleading their investors. The report singled out Goldman Sachs and Deutsche Bank's activities in the sketchy mortgage market.

Goldman Sachs last year paid a 550-million-dollar penalty to settle SEC charges that it had misled investors in a mortgage-bond investment.

Settlements in the current negotiations could come as early as next week, the Journal reported, starting with Morgan Chase.

At the heart of the fraud suspicions is the claim that banks neglected to inform investors that the mortgage packages they were buying into had been created with help of hedge funds that were betting the housing market would collapse.

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